How Wall Street Created a Nation: J. P. Morgan, Teddy Roosevelt, and the Panama Canal

What Really Happened to Create the Panama Canal?

When traveling from the Atlantic Ocean entrance of the Panama Canal to the canal’s exit into the Pacific Ocean at its other end, what direction are you going?

Most Americans would respond, “That’s easy. It’s east to west.” But they would be wrong. Check a map. The shape of the Isthmus of Panama and the cut of the canal make the journey a 51-mile trip from northwest to southeast.

If the author of a new and revisionist history of the Panama Canal is correct, geography isn’t the only thing about the Big Ditch that Americans don’t know. Ovidio Diaz Espino’s account of the political intrigue and treachery that made a few people a lot of money certainly isn’t standard fare in the history books. Instead, we’re taught that the swashbuckling visionary Teddy Roosevelt rushed to the aid of freedom fighters in Panama, helped them secure their independence from Colombia, and then led the building of the Canal in just the right spot.

History texts often offer a quick reference to TR’s playing fast and loose with the Colombians, but they usually wink at it and move on. What’s wrong with a little gunboat diplomacy if that’s what it takes to get those selfish, backward Latin Americans to get in line? Great ventures for the good of all require a little bending of the rules.

Like other schoolchildren growing up in Panama in the 1960s, Espino learned about the struggle of the Panamanian patriots helped by TR. But it was years later as a lawyer for J.P. Morgan in New York City that he first learned of a very different perspective. At a party he was introduced to a screenwriter named Webster Stone, who asked a startling question, “Did you know that your country was conceived in Room 1162 of the Waldorf Astoria?” Stone’s revelation plunged Espino into a four-year investigation that culminated in this book.

The French attempted a Panamanian canal in an ill-fated venture that collapsed in 1889. Shares of Ferdinand de Lesseps’ company languished nearly worthless as its equipment rusted in the Panamanian jungle, but the rights to build a canal there were another matter. They could be worth a fortune–but only if the United States entered the picture and took up where the French left off.

The U.S. government had long favored the idea of a canal somewhere in Central America. When the French adventure collapsed, it was only a matter of time before the United States got involved. A consortium of Wall Street financiers schemed to buy the rights to a Panamanian canal for a song and sell them to the U.S. government at a huge profit. But a roadblock called Nicaragua stood in their way.

By the turn of the century, it was widely accepted that the best route for a canal would be across Nicaragua. That country was offering the land for free, whereas the Wall Street crowd that had bought up de Lesseps’ rights in Panama were holding out for $40 million. Moreover, the route through Nicaragua was closer to the United States, featured upwards of a hundred miles of navigable lakes and rivers, and offered the easiest-to-cross pass through the Central American highlands. To top it off, Nicaragua was more stable than strife-ridden Panama.

Espino’s story of how the New York financiers swung both TR and Congress over to the Panama side of the debate is an extraordinary account of double-dealing, deception, and dollar diplomacy. The pro-Panama forces even swayed some votes by claiming that Nicaragua was too risky, offering samples of that country’s postage stamps, which depicted volcanoes spewing ash and lava, as proof!

Congress passed a bill on June 19, 1902, giving preference to Panama on the condition that a satisfactory treaty be negotiated with Colombia; otherwise, the president was ordered to proceed with construction through Nicaragua.

What happened next is too juicy to betray here. Suffice it to say that if Espino is right, both the Panamanians and the Colombians were double-crossed by Uncle Sam, while well-connected men like J.P. Morgan, Philippe Bunau-Varilla, and William Nelson Cromwell cleaned up. The author doesn’t claim that TR pocketed anything for his work on behalf of the Wall Street syndicate, but notes that he took extraordinary measures to make sure the trail went cold short of him.

The author’s work is marred by a tinge of class-warfare rhetoric. Espino seems to buy into the “robber baron” canard that rich men are inherently mischievous, if not corrupt and exploitative. In nonpolitical ventures, scions like J.P. Morgan accomplished much good. If Espino’s case is accurate–and he presents strong evidence–it was clearly political power and incompetent or corrupt government officials who made possible any undue gain from the Canal affair.

ABOUT

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s. Prior to becoming FEE’s president, he served for 20 years as president of the Mackinac Center for Public Policy in Midland, Michigan. He also taught economics full-time from 1977 to 1984 at Northwood University in Michigan and chaired its department of economics from 1982 to 1984.

THE FREEMAN

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December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.